To Build a Bigger Loophole

At this not-so-festive time of the year, the case against the income tax practically makes itself. Yesterday, a friend of mine from way back put the problem this way on Facebook: “Taxes suck. Why do the middle of the road people pay the highest percentage of their income?” and then later “seriously, is there some logic behind this?”

I gave her an answer, but I thought it might be worth taking the opportunity to elaborate. The answer I gave was basically this: In a graduated income tax, the very poor pay nothing or nearly nothing by design. The very rich can afford to put their money in tax havens, and they can afford accountants and tax attorneys to make sure they get every break available. The middle of the road folks aren’t poor enough to be exempt but aren’t rich enough to get all the breaks.

The elaboration I would offer is that this is not to speak ill of the rich, necessarily. The income tax works on the premise that the government is the true owner of whatever money you earn, and that it will decide how much of those earnings you’ll be allowed to keep. The fact that the money is withheld from your paycheck before it gets to your hands makes plain that this is the philosophy in operation. The government takes money from every income-earner whether or not the person can afford it, and without regard to whether or not that person agrees with how the money is spent.

Anyone else taking someone’s money without their consent would be labeled a thief, no matter what they intended to use the money for. So, if a thief approached someone demanding money, and that person was in a position to ensure that the thief took less of their money than he otherwise might (say by having some tucked away in a safe place), why shouldn’t the victim avail himself of that position? Wouldn’t more of us do the same if we could?

This is what loopholes in the tax system are for, to allow the income-earner to keep more of their own money. Only individuals can allocate their money in ways that satisfy their wants most efficiently. Only individuals can grow the economy by producing desirable goods and services and by spending their earnings on the goods and services that they themselves desire. The goal of taxpayers should not be to close loopholes for the top earners, nor should they begrudge them the opportunity to keep their money; the goal should be to expand those loopholes as widely as possible, so that more and more taxpayers qualify to keep more of their own money. As the economist Ludwig von Mises said, “Capitalism breathes through those loopholes.”